Shale Pioneer Chesapeake Warns it May Not Survive Low Gas Prices

Chesapeake Energy, the company that was once the epitome of America’s shale-gas fortunes, is warning it may not be able to outlast low fuel prices.

Reflecting growing pain across the energy sector, the Oklahoma-based company’s shares and bonds tumbled Tuesday after it said it may not be viable as a “going concern” if low oil and natural gas prices persist. The warning came just over an hour after the company posted a wider-than-expected loss for the third quarter.

A decade ago, Chesapeake was a $37.5 billion company led by the energetic Aubrey McClendon, an outspoken advocate for the gas industry. Chesapeake became the second-largest U.S producer of the fuel. But in 2016, McClendon was indicted by a federal grand jury on charges of conspiring to rig bids for the purchase of oil and gas leases. A day later, he was dead after his car collided with a highway overpass.

On Tuesday, Chesapeake’s market value was $2.6 billion. The company was brought low by years of low gas prices, the result of an industry that has been the victim of its own success in cracking open shale-rock formations for access to additional supplies.

The company has spent the years since McClendon’s death selling assets, cutting jobs and trying to produce more oil in an effort to chip away at a mountain of debt. Its notice Tuesday comes as shale producers struggle to prove to investors they produce positive cash flow, not just grow at any cost.

The going-concern warning signals that Chief Executive Officer Doug Lawler’s six-year campaign to rescue Chesapeake from the billions of dollars in debts amassed by McClendon may be on the verge of failure. Lawler, who was hand-picked for the job by activist investor Carl Icahn, long sought to convert the gas giant into an oil company, to no avail.

If oil and gas prices remain low, the company may not be able to comply with its leverage ratio covenant during the next year, “which raises substantial doubt about our ability to continue as a going concern,” Chesapeake said Tuesday in a quarterly filing. The warning comes less than a year after Lawler orchestrated the $1.9 billion takeover of shale explorer WildHorse Resource Development Corp.

Shares fell as much as much as 17%, the most in more than three years. Chesapeake’s 8% coupon notes due 2025 are among one of the most actively traded securities in the high yield market, according to Trace. The bond’s price dropped by over $4, the largest price drop on record for the security. Its 8% coupon notes due 2027 also plunged to its lowest price ever.

Executives tried to assuage some fears on a third-quarter conference call. The producer continues to look at opportunities to improve its balance sheet, including asset sales, deleveraging acquisitions and capital funding options, they said.

“We could go out and seek a waiver at any time from our bank group, but at the moment we continue to be focused on the strategic levers that result in permanent debt reduction,” Chief Financial Officer Nick Dell’Osso Jr. said.

‘Massive Debt’. Chesapeake’s borrowings totaled $9.73 billion as of Sept. 30, up from $8.17 billion at the end of last year.

“With massive debt, leverage is not going down every quarter you continue to outspend,” Neal Dingmann, an analyst at SunTrust Robinson Humphrey Inc., said by phone. “What is leverage going to look like next year and how are you going to address it internally or externally? That’s the story.”

Though Chesapeake plans to reduce spending by almost a third next year as it seeks to generate free cash flow, its third-quarter capital expenditures rose 16% from a year earlier as it completed more wells. The producer is standing by its budget guidance for full-year 2019.

Chesapeake has already taken some steps to cut debt. In September, the company announced a $588 million debt-for-equity swap. In an earnings statement earlier Tuesday, Chesapeake said it had restructured gas gathering and crude transportation contracts in South Texas and the Brazos Valley to improve future returns.

“They need to walk people through how they plan to get free cash flow,” Sameer Panjwani, an analyst at Tudor, Pickering, Holt & Co., said by phone. “A big part of it could be asset sales. They’ve talked about it before on a high level, but how far along are they in some of these processes?”


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